Budget 2020: Government must choose between prudent debt levels and a 'borrow and hope' approach

Hardly anyone has questioned the merits of the Government spending taxpayer money in response to Covid-19, or examined its implications for public debt levels and future tax burdens.

Next week’s Budget 2020 will reveal those fiscal implications. The document will make grim reading. Spending is likely to be way up and revenue way down on Treasury’s December 2019 forecasts.

In the Minister of Finance’s own words, the $12.1 billion to support business incomes and jobs is “unprecedented” before adding that the “first stage of our economic response represents over $20b” of spending.

At about $11,000 per household, that is a hefty potential tax hike. To the best of my knowledge, no measures to judge the success of this spending have been proposed.

This means New Zealand should prepare for big fiscal deficits.

This Government was a big spender before the virus struck. It turned a pre-election 2017 forecasted fiscal surplus of $5.7b for the year ended June 2020 into a forecast $900 million deficit by the end of last year, despite higher tax revenues of $2.9b.

Public debt will now spiral upwards. Treasury’s December 2019 fiscal forecasts showed it would need $18b to fund capital spending for the year ended June 2020.

That is nearly $6b more than Treasury’s pre-election 2017 forecast for 2020. The Government’s January 2020 announcement of $12b additional infrastructure spending will push the trend line up beyond 2020.

Grant Robertson expects to announce further spending plans to stimulate economic recovery after the lockdown.

He has promised general and sector-specific support to “help boost wider economic confidence, and regenerate some of the sectors hit hardest by the pandemic.”

No Labour finance minister has faced chronic fiscal deficits and spiralling public debt since Roger Douglas in 1984. That Government faced default on its inherited debt obligations.

The fiscal responsibility provisions in the Public Finance Act were put there to avoid a repeat of that searing experience by requiring a Government to explain how it plans to turn fiscal deficits into surpluses and restore the public debt back to prudent levels.

Budget 2020 cannot be expected to solve this within in a three-year forecast period. However, what will count is the credibility of the strategy to avoid a repeat of the pre-1984 debt spiral.

Those thinking about investing in New Zealand will want to know that the Government is operating in a fiscally sustainable manner. Sovereign debt rating agencies will be watching too.

The choice of strategy is crucial. The best way out of the current situation is economic growth to reduce unemployment and lift tax revenues. There are basically two options: “Government knows best” or “free people up to meet each others’ needs.”

This Government seems to be signalling that Budget 2020 will take the first approach. In that case, the risk is that rushed ‘shovel ready’ spending will divert scarce resources into poor quality projects. Kiwis would be deprived of the opportunity to use those resources to better meet their needs.

New Zealand has been down this path before. Older readers will remember the “Think Big” projects of the late 1970s. They largely failed.

The German ‘economic miracle’ after World War II illustrates the second approach. Dr Oliver Hartwich, executive director of the New Zealand Initiative, last week presented to the Parliamentary Epidemic Committee the key ideas underpinning that miracle.

Hopefully, the Government is considering such wise council. The country’s future prosperity is at stake.